Stage Set For Newbuilding Activity

Fleet replenishment, increasing demand to drive new ship orders Fleet replenishment and increasing shipping demands will drive the ship newbuilding market, with production levels possibly doubling on an annual basis over the next five years, said James R. McCaul, president, IMA Associates (Washington, D.C.). This infusion of shipbuilding business should lead to higher ship prices and slower turnaround, while serving as the final spark to fully ignite commercial business in, among other areas, the U.S. and China.

Mr. McCaul — a respected and oft-cited industry analyst — recently completed a five-year outlook study entitled Shipbuilding Industry Outlook For The Next Five Years. He spent time with Maritime Reporter & Engineering News to discuss his findings and their ramifications to the shipowner, shipbuilder and equipment supplier.

The Realities Of An Aging Fleet Mr. McCaul reasons that replenishment rates over the past two decades have left the current large ship fleet old and in need of replacement. "In general, there are 20,000 large ships over 1,750 gt and/or 100 m in length," said Mr. McCaul. "On average, these ships last 20 to 25 years," and by the fourth or fifth inspection, it becomes increasingly difficult — and costly — to keep them up to specification.

In order to maintain the world fleet inventory, he said that annual worldwide newbuilding output should be between 800 to 1,000 ships per year. In analyzing ship production over the last 20 years, Mr. McCaul found this demand has not been met. For example: • from 1975 to 1979, there were 965 new ships built annually; from 1980 to 1984, 817 ships annually; • from 1985 to 1989, 561 ships annually; • and from 1990 to 1994, 497 ships annually. Consequently, the average age of tankers has doubled, from eight years in 1975 to 16 years in 1994; and the average age of bulk carriers has increased from eight years in 1975 to 14 years in 1994.

"The average age cannot continue to increase," Mr.McCaul said. "The stage is set for a big rebound in ship construction." He estimates the ordering pace will have to reach levels between 1,000 and 1,500 ships per annum to keep pace.

While these numbers depict a bright outlook for builders and sup- gliers, it should be noted that only eet replenishment projections are taken under consideration. When projections regarding demand are factored in, the market looks even more promising.

But make no mistakes, "the big driver, the big gorilla, is the replace- ment requirement," said Mr. McCaul.

Higher Prices, Slower Deliveries "A sudden increase in orders will be difficult to accommodate. This increase will likely strain available shipbuilding resources. The result will be a spike in price levels," Mr. McCaul said.

He also projects that once the demand starts to rise rapidly, the market will overheat and draw many speculators into the market, speculators who will acquire and resell shipyard space. The result: upwardly spiraling ship prices.

The upturn in new order activity should serve to draw in even more owners, owners ordering ships in order to avoid the higher prices. This action will serve to drive the prices even higher. In turn, delivery times should increase dramatically, as the available shipbuilding capacity will have initial problems being mobilized to accommodate a jump in demand. In particular, slowdowns will affect the very large ships — VLCCs and large containerships — as space available to build these vessels would be especially tight.

U.S. Yards: Picking Up The Slack As shipbuilding demand rises dramatically, owners can increasingly turn to shipyards in the U.S.

to build a variety of vessels. The evolution of the shipbuilding industry in the U.S. over the past few years — from primarily navy to a commercial mix — has been dramatic for certain, yet still incomplete. The resources and support are in place to ensure the long-term success of U.S. yards in the commercial market.

Well-recorded in these pages has been the progress — and the steady stream of interest and orders — fueled by the revamped Title XI financing program. Although political changes and worldwide agreements seemingly pose a challenge to maintaining this momentum, it appears that nothing can stop U.S. yards from increasing their share of the commercial pie. Simply put, "The Department of Defense feels that it needs shipyards in this country, and whatever it takes to do that, it will happen. How do you keep the capacity to build military ships in the future? You have to have the assets available, and that means commercial business," said Mr. McCaul.